Hi everyone, I'm back for this week's video and I hope you all of you are staying at home and practicing social distancing. It's a really scary time with what's happening in the country, in the markets and in the economy as a whole. And so I thought of shooting this video from home instead of from the office for these very reasons.
The main purpose of shooting this video is - I want to take away the fear of investing, the fear that most investors get when we watch the media and what's playing in the news channels all the time of all doom and gloom and how markets are collapsing and all the next recession is happening and how we are all basically doomed.
All we have to do is take a deep breath, stay calm, and know that the good principles of investing work as long as we let them
work for us.
The topic of this video is 'What happens when you stay invested for the long term and ignore short-term market moments'.
- The first thing that happens is your money gets time to work for you,
- The second is the risk of loss reduces, and
- The third, you have less financial stress
Now I'm going to talk about these three points by showing you some actual numbers with a file that I have created and that file shows you the performance of markets over the last 20 years.
The first example I'm looking at for this is, the performance of stocks over the last twenty years and this file is having 10 stocks - names that you know and you have grown up with. Most of these names would be very familiar to you.
Companies such as:
- Caterpillar Inc.
- Vertex pharmaceuticals.
- Walt Disney,
- Marriott International
- Tractor Supply Company, and
- Northrop Grumman.
These are some of the top companies from each of these industries that we have chosen, and as you can see this is a very diverse portfolio with one top company from each industry.
Now I want you to imagine this scenario where you have invested $10,000 in each of these stocks and just let the money sleep for various periods of time. Then in this file what we are going to see is how the markets perform given various amounts of time for the stock to grow.
So let's assume that you invested one year ago, $10,000 in ten stocks that equals $100,00. Now as you have seen what's happening in the last one year, the turmoil in the markets, everything that's played out. In this example, if you had invested one year ago, you would have lost 11% of your portfolio value over the last one year. That's scary and many people think that's the reason why I'm not in the stock market.
But let's imagine what would happen if you had invested three years ago. Now in the same example if you invested three years ago you and decided to that you just leave the money in there and how would your money have grown. So if you had invested three years ago, your money would have gone from $100,000 to $123,000, and you would have netted 8% per annum as a growth.
Now considering inflation is 3% per annum, 8% per annum is a pretty decent number.
Now take that to the five year mark, and imagine you invested in 2015, the $100,000 has grown to $134,000 which is 7% per annum. It's more or less similar to the three year performance. By this time you're saying - Amit what's so special about this video you're making because 8 or 7% is nothing to write home about. I agree with you - it's not anything to write home about, but still it's a decent growth that you get, if you just leave your portfolio alone, and let the money work for you without fiddling too much.
Now let's look at the 10-year number. In ten years, that is if you had invested in 2010 instead of 2015, the same $100,000 would have grown to $160,734, which means you have got an annualized growth of 26% per annum. Now this is decent by anyone's standards in a portfolio which has not been fiddled with, there has been no buying or selling, and there has been no timing the market at all. We just followed Warren Buffett's principle of staying invested for a long term.
There's still one more column, and I'm sure its going to blow your socks off. The last column is the 20-year growth column, and as you can see if you had invested $100,000 not in 2010, but in the year 2000 itself that $100,000 which was invested 20 years ago and forgotten about completely, would have grown to $1.6 million, with an annualized growth of 72% per annum. Now that's something to write home about.
What I want you to take away from this particular file is - 'Markets and money need only one thing to grow and that is time.'
As long as you allow enough time for your money to grow there is no way your money would be lost, or you would get less than what you invested, unless something like a big global war happened.
As you can see a period of 7 to 8 years, or even a 5-year period is a decent period where the chances of you getting less than what you invested reduce, and the chances of you getting way more than what you invested increase dramatically.
In summary, the three things that happen when you leave your money invested for the long term and when you ignore short term market moments is -
- Your money gets time to work for you,
- The risk of loss reduces, and
- The third and the most important thing that happens is you have less financial stress.
I'm sure you got much more better things to do like spending time with your family, following the hobby that you like, or even doing the work that you like, without having to worry about how markets perform, and whether your future is protected or not. Those things are not relevant in the short-term, they are relevant in the long-term.
I wish you good luck with your financial goals and as usual, if you have some questions feel free to leave them in the comments section below.
Thank you stay at home, and